The health care sector is the worst performing sector over the past year. The cyclical sectors continued to outperform the past few months as economic growth prospects improved. Since the health care sector is naturally more defensive, it's not surprising health care lagged the recent rally into record territory by the S&P 500. Although health care currently lacks momentum, it does have positive long-term fundamentals in terms of demand growth and scientific innovation. Deloitte sees North American health care spending growing by 4.9% through 2018, and global spending by 4.3% through 2019. According to IMS Health, the global pharmaceuticals market grew 6% in 2015, and U.S. drug sales increased 8.5%.

source: bloomberg

This graph shows expenditure data on the healthcare sector as a percent of GDP. The The U.S. spends 17% of GDP on health care, Europe & Japan 10%, and China 6%.

source: bloomberg

This graph normalizes 1996 to 1, so that the rate of change can be easily compared. Although the U.S. has the highest level of spending (first graph), Japan and China have the highest growth rate in health care spending as a percentage of GDP. IMS Health sees U.S. drug expenditure increasing from $425 billion in 2015 to $610-$640 billion in 2020, a CAGR or 8.9%.

source: bloomberg

With 1996 normalized to 1, the last graph shows the growth of U.S. spending on prescription drugs and healthcare overall. The data here is not a percentage of GDP. The graphs makes it obvious that the growth of spending on prescription drugs is growing much faster than spending on health care overall. The drug segment of the health care sector should continue to see growth above the growth rate of GDP and also above the growth rate of the health care sector. Although political risks are elevated, these trends in health care spending will not be changed easily. Therefore, I see the weakness as a opportunity to overweight to the health care sector through $XLV.